ADDING A LIFE PRODUCER: THE CONTRACT IS KEY

ADDING A LIFE PRODUCER: THE CONTRACT IS KEY
by Dave Goodwin

WHAT IT MEANS TO YOU

Better to be safe than sorry when it comes to hiring Life producers. You should exercise caution before offering a job to a candidate; answer the questions presented below and draft a contract that will protect the agency and the producer.

CAVEATS

Before proceeding to the contract stage, ask:

Does this person exceed your minimum standards? Don't choose one person who seems best only when compared to other candidates if, standing alone, that choice doesn't look good. It might be better (and in the long run, more profitable) to close the search and start over again after a short breather.
Have other staff members spent enough time with the candidate to form a tentative opinion about compatibility?
Have you discussed some of the potential trouble spots in your relationship and ascertained that they will not be problems? Such potential problems include: ownership of Life accounts; non-compete and non-piracy covenants; prohibitions against the Life producer removing files from the office (copies are okay); the urgency of paperwork and reports, such as feedback on leads and applications; and any other office procedures the agency requires. You can't cover all possible contingencies, but review the important ones at this early stage.
Have you discussed the agent's financial needs, starting with the first few months, when income will be thin? If there are no special commission arrangements with carriers, remember that it may take four to 10 weeks from application-taking to commission-check arrival. If you agree on a draw, are you satisfied that the agent can get by on that draw? Do you both agree on the time frame for reducing the draw, and the formula guiding its reduction?
Have you reviewed the products of any Life companies with which you might want to write business? Some key P/C carriers may benefit the agency if they get Life business. (Such business would benefit the Life agent indirectly by building a healthier base of P/C insureds.) Often, the Life producer objects to the product, the premium, and/or the commission scale of such companies. It's best to resolve such issues before writing the contract. Working solutions are much easier to reach at this stage.
Have you agreed on a production timetable? It's hard to know where you're going if you don't have a map. Monthly projections should show the prospecting activity, the number of applications, and the gross commissions earned. Display anticipated overhead.
Have you agreed (if appropriate) that your producer will not place any business anywhere, regardless of its nature or source, except through your joint entity? This should be clear because even one case, big or small, placed without your knowledge could be a bombshell in potential E&O exposure-leading to loss of clients, loss of referrals, and other problems. The fact that your commission share will have been lost adds insult to injury. Each party could give the other the right to check with the state insurance department for a list of all life carriers with which he or she is licensed, and the right to obtain from each carrier a copy of the commission statements paid. This is one check that all business written has been placed into the proper records.

If you include provision in the producer's contract, exercise your option occasionally and check commission statements. Even if the relationship is going well, let it be known that the agency is serious about its Life operation investment. Second, you may uncover cases violating the agreement. They may be innocent oversights-or intentional, with malice and larceny intended. Know what's happening; the Life producer should understand why it's important to you.

THE CONTRACT

In broad terms, the contract addresses the business relationship for as long as it lasts and afterwards. Don't start the relationship without some written agreement. It may be a letter agreement in the beginning; if so, set a date for conversion to a full contract. An amazing number of well-run P/C agencies don't have written agreements with Life producers; many horror stories could have been avoided by such a simple procedure.

Here are starting points in building a fair contract. If you already have any Life/benefits producers working without a contract, discuss the mutual benefits of creating one. It's as much to the producer's benefit as it is to the agency's.

If any of these points are omitted from the contract, they should be by intent rather than oversight. Of course, the contract should be expanded and adapted as needed.

1. The agreement recognizes the relationship of the Life/benefits operation to the P/C agency from which it springs.

2. "A"-the P/C agency or principal-and "B"-the Life agent-desire to enter an arrangement to develop Life/benefit sales and service under terms and conditions set here in.

3. In the furtherance of that goal, A will form a corporation and own all the stock subject to the earn-in rights of B as set forth here.

4. B will be president of that corporation.

5. B will devote his/her full business time to that corporation (hereinafter referred to as "C").

6. All Life, benefits, and related insurance written by B shall be placed through C, irrespective of source or whether connected to A in any way.

7. All renewal commissions on business written by A or B prior to the date of this agreement shall belong in full to the writing agent. But any new business written on or after the date of this agreement, including but not limited to re-writes, pour-ins, options, conversions, or other commissionable transactions, shall go through C as expressed in section 6 above.

8. Each party shall, upon request, deliver to the other a list of all Life/Health companies with which he/she is licensed, and each grants to the other the right to obtain such a list from the state insurance department(s) involved. Each further grants to the other the right to obtain from any or all such Life/Health companies information with respect to all business written since the date of this contract, including but not limited to: the names and addresses of all applicants and insureds, policy numbers, amounts issued, premiums paid or due, commissions paid or due, and bonuses paid or due.

9. Commissions and all other revenues earned and received on all Life/benefits insurance written through C, whether new or renewal, shall be paid and/or applied as follows:

a) Up to and including $125,000 per fiscal year

i) twenty percent to all general expenses of C, including office overhead, fringe benefits to be provided to B, finders' fees or commissions to be paid to producers other than B; unused amounts shall be divided equally between A and B;

ii) forty percent to be paid monthly to B;

iii) forty percent to be paid monthly to A.

b) From $125,001 to and including $250,000 per fiscal year;

i) twenty percent to expenses as in a) i) above;

ii) forty-five percent to be paid monthly to B;

iii) thirty-five percent to be paid monthly to A.

c) In excess of $250,000 per fiscal year,

i) twenty percent to expenses as in a) i) above;

ii) fifty percent to be paid monthly to B;

iii) thirty percent to be paid monthly to A.

10. During the first three months of this contract, B shall receive from C a draw against future commissions of $3,000 per month, subject to the following conditions:

a) B shall have substantially satisfied and met the minimum activity levels shown in Appendix A attached hereto;

b) Any amounts to be paid to B as his/her share of commissions earned under section 9 above shall be first offset by the monthly draw repayment, but such repayment shall not exceed $3,000 in any single month.

c) After the first three months, the draw shall be reduced to $2,000 per month.

d) After the first six months, the draw shall be reduced to $1,000 per month.

e) After the first nine months, the draw shall be abolished.

f) Irrespective of section 10 and all its subheadings above, the draw shall be abolished within 30 days after B shall have received monthly payments of commissions amounting to:

i) $12,000 in any three consecutive months, or

ii) $24,000 in any six consecutive months.

11. Repayment of the draw by B to C shall be made according to the schedule in Appendix B.

12. If this contract shall terminate, or if B or C shall terminate this contract, B agrees to repay all amounts owing and unreimbursed on the excess of total draws received over commissions and revenues earned and received by B, together with interest thereon at the rate of 8% per annum, such repayment to be made within 60 days of termination date. If B defaults on such payment, B shall be additionally liable for collection expenses and reasonable attorney's fees.

13. B shall be solely responsible for all travel and entertainment expenses incurred by him/her and shall not be entitled to any reimbursement of such expenses except as expressly provided by C.

14. Expenses incurred for continuing education, marketing, or other training or education pursuits shall be considered general overhead expenses, provided that C shall have granted prior written approval to such expenditures.

15. B recognizes and acknowledges that A and C will be sharing with B information about past, present, and future clients of A, and that such information is solely for the purpose of developing legitimate business efforts for such clients through B's efforts. B further recognizes that such information is to be used only in a professional manner and agrees that he/she will not jeopardize or harm in any way the relationship between A and any such client.

16. B acknowledges that the information in section 15 above, as well as other information with which he/she will become acquainted throughout the terms of this agreement, is confidential information belonging to A, and that B will not, during the terms of this agreement or any time thereafter, directly or indirectly disclose or use any such confidential information except as may be required in connection with his/her work hereunder. Such confidential information includes but is not limited to: the names of clients or customers, their business information or specialized knowledge about them, policy limits, terms, conditions, rates, premiums, expiration dates, loss data, claims history, and risk characteristics. B recognizes and agrees that the violation by him/her of any of the provisions of this paragraph would cause irreparable damage to A, which would be difficult to ascertain and that an award of money damages would not provide adequate relief and/or may not be affected in a timely manner, and therefore agrees that, in addition to all other remedies available in the event of any breach, A shall have the right to injunction relief.

17. B agrees to maintain, throughout the term of this agreement, the necessary licenses and educational levels as may be required by the state(s) in which B shall do business, and agrees that failure to maintain such requirements shall give A or C, singly or collectively, a basis for termination of this agreement.

Email this article to a Friend